While industry will welcome flexible labour laws and procedural simplifications, it is likely this will create an unlevel playing field for units that are not located in these SEZ-style industrial zones.
Dharmakirti Joshi
Chief Economist, Crisil*
NMIZs will reduce the constraints imposed by inadequate infrastructure, rigid labour laws and procedural bottlenecks
The discussion paper on a National Manufacturing and Investment Zone (NMIZ) policy released by the Department of Industrial Policy and Promotion could not have been timed better. There is little doubt that India has caught the imagination of the world like never before — first by growing at 9 per cent for five years preceding the recent economic crisis and then by demonstrating its resilience in the downturn. Savings and investment rates of over 35 per cent that were achieved during the boom are the highest ever and indicate a structural transformation. But India’s manufacturing sector has not joined the race — instead of being an engine of growth, it has, at best, kept pace with the overall expansion in gross domestic product (GDP). When the Indian economy began opening up in the early nineties, the share of manufacturing output in GDP was around 15 per cent. Two decades later, in 2009-10, the manufacturing sector’s share in GDP stands at 15.8 per cent. It is true that there are star performers within India’s manufacturing sector like the auto industry and in some of these manufacturing sub-sectors, India is emerging as a key outsourcing hub. These stray success stories notwithstanding, the sector’s overall performance leaves much to be desired.
India is a young country with about 650 million people (61 per cent of its population) in the working age group of 15-59 years, and the population in this age group is set to expand in the next couple of decades. India has the opportunity to capitalise on its demographic dividend by becoming a huge production and consumption base. But if it does not create sufficient employment opportunities, its large population could simply turn into a huge burden. One of the major ways to create employment is by scaling up labour-intensive processes in the manufacturing sector. Infrastructural bottlenecks, cumbersome procedures and inflexibility of labour laws are often cited as the key factors that hold back India’s manufacturing sector.
Without adequate infrastructure which includes power, water, roads etc, India cannot sustain its competitiveness in the manufacturing sector. Moreover, cumbersome procedures and difficulty in procuring clearances further hold back infrastructure and industrial development. In addition, India’s archaic labour laws discourage companies from expanding their manufacturing capacities beyond the scale that attracts these laws.
According to a recent World Bank study, India is amongst countries with the highest degree of rigidity in hiring and firing regulations. The industry circumvents these constraints by outsourcing its activities, which leads to informalisation of labour force. The labour laws, therefore, limit the scope of expansion of formal manufacturing activity. The inflexibility to hire/fire also makes the industry more reliant on capital-intensive means of production. This is clearly an undesirable outcome in a labour-surplus economy. The inability of firms to cut their workforce accentuates their financial stress during a downturn and reduces their ability to come out of it. If these patterns continue and employment opportunities do not pick up, the perceived demographic dividend can morph into a demographic nightmare.
What is the way out? A simple answer to this rather difficult question is to improve infrastructure, amend labour laws and simplify procedures. Achieving this at a pan-India level, though desirable, appears to be an insurmountable task in the near term. That brings us to the issue of setting up of NMIZs, which the DIPP discussion paper proposes. NMIZ will, in a way, create islands of excellence, which will promote manufacturing activity, by reducing the constraints imposed by inadequate infrastructure, rigid labour laws and procedural bottlenecks. The Contract Labour Act, which prohibits companies from hiring temporary workers will be relaxed in these zones. The discussion paper proposes to take the share of manufacturing in GDP to 25 per cent and double the employment in this sector by 2022. Without proactive steps like NMIZs, India’s manufacturing sector will not become a dominant driver of GDP, as is ideally desired.
While it is necessary to amend labour laws, it is equally important to have a social security system to protect the interest of the workers. The discussion paper rightly proposes a safety net to protect the workers in these zones. Therefore, steps should also be taken to expedite the judicial process for these zones to allow workers to seek timely redressal from unfair treatment, if any.
Views expressed are personal
* Credit Rating Information Services of India Limited
M K Pandhe
Vice-President, Citu*
Laws relating to contract and other labour are already flouted — the NMIZ proposal will ensure a new form of slavery for the working class
The discussion paper on a National Manufacturing and Investment Zone (NMIZ) policy prepared by the Department of Industrial Policy and Promotion is set to create a new island of lawlessness with bountiful concession offered to manufacturers — and this is after the creation of over 500 Special Economic Zones (SEZ) all over India which offer large tax concessions! Though it aims at increasing the share of manufacturing sector from the existing 15 per cent to 25 per cent of GDP by 2022, the new initiative has offered unjustified concessions to the manufacturing sector.
On the plea of appropriate investment incentive and business-friendly mechanism, the proposal offers a 10-year moratorium on municipal and local taxes and a 4 per cent interest subvention. Liberal infrastructural support is also being assured by the government through the public private partnership route. Under these circumstances, the concessions offered by the government are likely to be misused — they will enhance the profitability of the manufacturing units instead of leading to an increase in the production.
The CEO of the special purpose vehicle to be constituted, who will have wide powers to issue approvals, may misuse the power, resulting in corruption. The proposal to share the 50 per cent of the cost of filing international patents is highly unreasonable since the benefits of the patents would be fully enjoyed by the patent holder but the cost of application will be shared by the government — those who can afford to apply for patents are not so poor. The corporate houses mint money by using patents to their advantage. Yet the government is considering to even provide them with subsidies in applying for patents.
The SEZs were essentially meant for export-oriented industries. However, the present proposal is even applicable to indigenous marketed products. There will be discrimination against industries that will not operate within the NMIZs. Instead of really contributing to enhance the manufacturing sector, it will only create a set of specially privileged manufacturers who would take undue advantage of the concessions offered by the government.
Moving to the condition of the working class, the proposals gives “relaxation under labour laws”. Labour laws are already not implemented in the country and all the central trade unions have included this as one of the points in their nationwide campaign. Under these circumstances, further flexibility would mean non-implementation of the labour laws.
The contractorisation and casualisation of labour has converted large number of jobs from a regular to an informal status. The Contract Labour (Regulation and Abolition) Act is being violated openly and the Centre is behaving like a silent spectator. If the concept of the discussion paper is put in practice, a new form of slavery will be imposed on the working class and the gains of the trade unions after independence will be completely wiped out.
The proposed policy framework talks of “a progressive exit policy”. As a matter of fact, several thousand industrial units have been closed down despite legal restrictions but the government has never taken any action against such illegal closures. This phenomenon became more prominent after the recent economic crisis engulfed the country. Now, in the name of a “progressive” exit policy, closures would be given a green signal by the government, leaving the workers unprotected.
The present law protects the workers by providing that in case of closures, workers’ dues would have to paid in full before stripping assets of the company. Under the proposed policy, there need not be a wait for payment of all dues of the workers before stripping assets of the closed unit. This will hit the workers very hard. Already, lakhs of workers have not received their statutory benefits after closures of industrial units.
The last year’s Economic Survey mentioned increasing the weekly hours of work from 48 to 60 which would mean the workers will have to work two hours extra every day without any any additional remuneration. This will worsen the workers’ condition and violate the concept of India as a welfare state.
Hence the proposed policy changes will be strongly opposed by the trade union movement in India and if the government tries to enforce its action, it would only result in deterioration of industrial relation climate. This, in turn, will adversely affect the share of manufacturing sector in GDP.
Centre of Indian Trade Unions
